American credit rating agency Fitch Ratings warns that the war between Ukraine and Russia is more likely to impact the European insurance sector through second-order financial market volatility, instead of through direct effects from sanctions on Russian entities and other measures that are restricting Russian businesses.
Source: Vadim Ghirdă/AP
European re/insurers have little direct Russian exposure in their insurance books and investment portfolios, as well as negligible Belarusian and Ukrainian exposure, but volatility in global financial markets that has been caused by the conflict could majorly impact their capital ratios.
In addition, the conflict also raises the possibility of higher inflation occurring, which ultimately could lead to pressure on profitability, particularly for non-life insurance.
International involvement within the Russian insurance market has been limited since Russia invaded the Crimean Peninsula in 2014, which led to global reinsurers withdrawing much of their coverage.
In a press release, Fitch Ratings said that they estimate that global reinsurers’ coverage of risks in Russia typically accounts for less than 2% of their gross written premiums (GWP).
The exposure is mostly from specialty lines, such as energy, marine and aviation, typically written through Lloyd’s of London syndicates. Fitch Ratings added that Lloyd’s has said that less than 1% of the business which it transacts relates to either Russia or Belarus.
Fitch Ratings said: “Given European insurers’ modest Russian exposure, we believe the greater risk to their credit profiles could come from financial market volatility and higher inflation.”
They added that indirect underwriting exposure is harder to quantify, but they said that they believe it could materially affect the earnings of some companies, although it should not impact either their capital or ratings.
Furthermore, Fitch Ratings stated that they expect the conflict to lead to claims from trade credit, surety and political risk insurance, bought by corporate clients that do business in Russia, Belarus and Ukraine. These business lines represent only 4%-5% of GWP globally, with the affected countries accounting for a small part of that.
As most European re/insurers’ have strong capital relative to their ratings, a sustained downturn in financial markets could erode their capital headroom and put major pressure on some ratings.
Fitch Ratings also warned that the war could exacerbate high inflation which has already been accelerating due to supply-chain disruptions as well as margin pressure in short-tail lines due to the rising repair costs for buildings and vehicles.
Even though insurers may be able to increase premiums accordingly, if high inflation persists, reserve deficiencies could arise on long-tail lines.
This would also impact reinsurers too, particularly through general liability claims and excess-of-loss reinsurance treaties with fixed deductibles.
Meanwhile, cyberattacks on businesses and government agencies have increased since the invasion, which could lead to a big rise in cyber insurance claims due to data leakages and business interruption.
DBRS Morningstar recently warned how the fallout from the war between Russia and Ukraine could increase cyber-related insurance and reinsurance claims within Europe and North America.
Cyber insurance accounts for less than 5% of most insurers’ GWP and the market is skewed to larger and more well-capitalised insurers that cede much of the risk to reinsurers that have the ability to withstand large, catastrophe losses.
